Connect with us

Understanding The Real and Nominal Accounts [Basic Accounting]



Businesses keep two types of account; Real Accounts and Nominal Accounts. What is Real Account? What is Nominal Account? The following explanations may deliver easier understanding for you. Read on…


Real Accounts

Real accounts are those reported in the balance sheet, which is the summary of the assets, liabilities, and owners’ equities of a business. The label “real” refers to the continuous, permanent nature of this type of account.

Real accounts are active from the first day of business to the last day. (A real account could have a temporary zero balance, in which case it’s not reported in the balance sheet). Real accounts contain the balances of assets, liabilities, and owners’ equities at a specific point in time, such as at the close of business on the last day of the year.

A real account is a record of the amount of asset, liability, or owners’ equity at a precise moment in time. The balance in a real account is the net amount after subtracting decreases from increases in the account.

Nominal Accounts

Nominal accounts are those reported in the income statement, which is the summary of the revenue and expenses of a business for a period of time.

Balances in nominal accounts are cumulative over a period of time. Take the balance in the sales revenue account at the end of the year, for example. This balance is the total amount of sales over the entire year.

Likewise, the balance in advertising expense is the total amount of the expense over the entire year. At the end of the period, the accountant uses the balances in the nominal accounts of a business to determine its net profit or loss for the period — this is the main reason for keeping the nominal accounts.

Differences Of Real and Nominal Accounts

Here’s is another rough analogy to help you understand the difference between real and nominal accounts:

Consider the lemon juice held inside a jar at a particular point in time. The lemon juice is real because you can dip your toe in it (and you can taste it if you put your toe on your tongue, of course).

Compare this body of lemon juice with the total amount of lemon juice that flowed through the pipe over the hours. This lemon juice isn’t there because it has already gone (you drink it already). This amount is the measure of total flow for a period of time. Assets are like the lemon juice in the jar, and sales revenue is like the flow of lemon juice over the hours.

Nominal (revenue and expense) accounts are closed at the end of the year. After these accounts have done their jobs accumulating amounts of sales and expenses for the year 2007, for example, their balances are closed. Their balances are reset to zero to start the year 2008. Nominal accounts are emptied out to make way for accumulating sales revenue and expenses during the following year.


A business has just released its financial report for the year just ended, which includes its balance sheet at year-end and its income statement for the year. You take the time to count the number of accounts in each statement and find 20 accounts in the balance sheet and 6 accounts in the income statement. These counts do not include calculated amounts, such as the total of assets in the balance sheet and gross profit in the income statement. “How many accounts does the business need?” This typical question may spin in your head.

Well, the absolute minimum number of accounts that business needs is 20 balance sheet (real) accounts and 6 income statement (nominal) accounts. Otherwise, it doesn’t have enough separation of information to prepare its two financial statements. In actual practice, businesses keep many more accounts than they report in their balance sheets and income statements.

If you were to look at the chart of accounts maintained by even a relatively small business, you’d find hundreds of accounts (maybe more). For example, a business may keep a separate account for each checking account it uses but, in its balance sheet, report only one cash account, which is the combined total of all its separate cash accounts. Similarly, the business may keep different notes payable accounts, one for each note payable obligation, but combine all notes into one total liability amount in its balance sheet. Another example is a business that keeps different sales revenue accounts, broken down by product lines, sales territories, and so on. It reports only one total sales revenue account in its income statement (Public businesses are subject to disclosure rules regarding segment reporting of sales, which is too technical to go into here)

Click to comment

Leave a Reply

Your email address will not be published. Required fields are marked *

Are you looking for easy accounting tutorial? Established since 2007, hosts more than 1300 articles (still growing), and has helped millions accounting student, teacher, junior accountants and small business owners, worldwide.


Related pages

cpa study materialsthe installment method of recognizing revenuehow to calculate receivablessecured promissory notedaily sales outstanding calculationadjustment entries in accounting exampleifrs related party transactionsmaturity value of a notecriteria for a capital leasecapitalising interest on investment propertytenant improvements depreciationstatement of comprehensive income formataccounting entries for investment in subsidiaryestimate bad debt expenseaccount receivable flowchartdefinition of cogsaccounting for joint ventures us gaapprocess costing weighted average method examplehow to do a cash flow statement direct methodadjusting entries affect only expense and asset accountsdefine deferred revenuecapitalize interest expensepension accounting basicsaicpa researchhow to calculate the contribution marginaccounting adjusting entries problemssample far cpa exam questions9 accounting cycle stepsvertical analysis financial statementscash receipts and cash disbursementshow to calculate annual depreciation expensetrade receivables examplesproduction budget managerial accountingattestation by an auditor is thejob order costing examplewhat is throughput costingblank promissory note worddepartment of treasuries and accountswhat is financial statement assertioncaat auditlapping auditdisadvantages of abc costingcontribution margin variancewip formulacallable stockgillette financial statementsweighted average contribution margin ratio formulap&l variance analysisbad and doubtful debts journal entryrelevant cost for decision making with examplesledger entries in accountingvarious forecasting techniquesflexible budget calculatorhow to calculate cash paid for operating expensescalculating safety stocktax shield accountingaccounting conventions and doctrinesyardi bank reconciliationus gaap meaningwhat is economic order quantity in inventory managementhow to prepare cash budget accountingwriting a letter to irs to remove penaltiesifrs statement of cash flowsifrs definition of a liabilitygoodwill double entrytdr financedouble declining balance depreciation calculatorwalmart balance sheet and income statementwhat is the meaning of iasfinancial leverage formula accountinggaap inventory costing methodsexamples of intangiblessunk cost accountingborrowing costs capitalised